How do I report foreign business income?

Reporting foreign business income depends on the structure of your business — whether you operate as a sole proprietor, through a foreign corporation, or through a foreign partnership. Each structure has different reporting requirements and tax implications.

As a sole proprietor or single-member LLC operating abroad, you report business income on Schedule C of your Form 1040, just as you would for a domestic business. Your net self-employment income is subject to both income tax and self-employment tax (15.3%). You can claim the FEIE on the net earnings, but this only reduces income tax — self-employment tax is still owed (unless a Totalization Agreement applies). Business expenses are deductible using the same rules as domestic businesses.

If you own a foreign corporation, the reporting becomes significantly more complex. A Controlled Foreign Corporation (CFC) — generally a foreign corporation more than 50% owned by US shareholders — triggers reporting on Form 5471, which is one of the most detailed international information returns. Under the GILTI (Global Intangible Low-Taxed Income) and Subpart F rules, certain income of the CFC may be taxable to you even if not distributed as a dividend. The penalty for failing to file Form 5471 is $10,000 per form per year.

Foreign partnerships require reporting on Form 8865 if you meet certain ownership thresholds. Similar to corporations, partnership income typically flows through to you and is taxable regardless of whether distributions are made.

For all structures, you must also consider: Form 8858 for foreign disregarded entities, Form 926 for transfers of property to foreign corporations, FBAR and FATCA reporting for foreign business accounts, and transfer pricing rules if the business transacts with related US entities.

Foreign business income is eligible for the Foreign Tax Credit for any business income taxes paid abroad. The FEIE may also apply to self-employment income from a foreign business. Choosing the right business structure and tax strategy before starting operations abroad can save significant money — restructuring after the fact is often difficult and costly.